JPC Articles

Palestinian Financial Crisis Looms

The Palestinians face an economic crisis more severe than the World Bank had anticipated; the Bank fears that the territories may become "ungovernable." This is not actually new, but since the Bank in its panic is considering bypassing restrictions on money to Hamas, it is worth looking at the roots of the "crisis."

The Palestinian Authority's 2012 budget -- produced by PM Salam Fayyad, the West's "go-to man" for economic decision-making -- was a fantasy. It called for $3.5 billion in spending, including $1.1 billion in aid, and showed a deficit of between $750 million and $1.1 billion. The latter has proven to be closer to the truth. The Palestinian economy was expected to generate about $1.3 billion, and the PA planned to spend three times that. (By comparison, Vermont, the smallest generator among U.S. states, produced about $26 billion last year.) U.S. aid ($513 million, not including security assistance) was expected to cover about 20% of actual PA spending, with the Europeans kicking in another 20%.

With planning like that, who could be surprised by a $200-million cash shortage?

The World Bank blames the world economy and Israel. It does not find fault with Palestinian corruption, an outsized security force, an oversized bureaucracy, an overreliance on other people's money, or the failure to find things to do that produce income. It declines to consider whether the ongoing Palestinian war against Israel has had an impact on the Palestinian economy.

There used to be income.

In 1992, 115,600 Palestinian workers entered Israel every day; in 1996, it was 63,000. Why? Because beginning in January 1995 and through the year, a series of Palestinian terror attacks -- mainly suicide bombers on buses, but including a particularly gruesome nail bomb that exploded in the center of Tel Aviv -- killed more than 100 Israelis. Israel responded by permitting fewer Palestinians to enter.

Increased security in Israel allowed the number of Palestinians to rise again, and unemployment decreased from 18.2% in September 1995 to 11% by September 2000. In mid-2000, 136,000 were working inside Israel -- 40% of all employed Palestinians. Another 5,000 worked in the joint Israeli/Arab run Erez Industrial Zone in the Gaza Strip. Thousands more worked in the West Bank and the Gaza Strip in Israeli-owned businesses.

Yasser Arafat launched the so-called "second intifada" in late September of that year1. Begun at the peak of Palestinian economic integration with Israel, the terrorist war ultimately killed more than 1,000 Israelis and wounded more than 5,600 (comparable U.S. figures would be 40,000 and 224,000 -- factors of 40). Israel's defense included reducing the number of Palestiniansworking in Israel, and by March 2001, the number had been reduced to 55,000. The Erez Industrial Zone was a particular target of Palestinian terror attacks; after 11 Israelis were killed there, the complex was closed.

Israel re-established security control of the West Bank, and the "intifada" ended in 2004. In 2005, Israel removed its presence from the Gaza Strip. There was no Gaza embargo, no impediment to independent Palestinian economic activity at the time. In fact, the Palestinian new agency Ma'an waxed ecstatic about economic opportunities for the Palestinians in Gaza, particularly with the acquisition of the greenhouses and agricultural equipment the Israelis were leaving behind in a $14-million deal brokered by then-World Bank President James Wolfenson.

Palestinian looters attacked the greenhouses almost immediately, and by early 2006, the greenhouses and the $100 million in annual exports to Europe they had produced were destroyed.

Hamas took control of Gaza in 2007 after a brief and brutal war with Fatah. With Hamas's declared intention to wage war against Israel, rocket attacks that had begun in 2001 escalated dramatically. After more than 9,000 increasingly long-range and accurate rockets and missiles, Israel launched Operation Cast Lead in 2008/09 and the Israel/Egypt blockade of Gaza ensued2.

It should be noted that the Hamas budget is separate from that of Fatah on the West Bank. In 2012, it showed with planned revenues of $60 million and a planned deficit of $480 million. Hamas "revenues" are derived largely from smuggling -- those revenues will fall dramatically if Egypt opens the Gaza/Sinai border -- and it relies on money from Iran to fund the rocket war against Israel.

"Civil servant" salaries in Gaza are paid from Ramallah using Western money not permitted to go directly to Hamas. Fatah also pays "salaries" to Palestinian terrorists in Israeli jails and pensions to retired terrorists. Both Hamas and Fatah paid an "honorarium" to the terrorists released in the Gilad Shalit deal.

There is a pattern here.

The Palestinians are at war with Israel, and wars have consequences. One is that normal economic activity is impossible within the Palestinian territories and between the territories and Israel. Deliberately. And with the knowledge a) that essential services will be handled by one or more NGOs or charities, with the active assistance of the government of Israel, and b) that Israel will be blamed for the mess.

The World Bank and other donors fall precisely into the trap, treating Palestinian poverty as if it has no relationship to Palestinian government policy -- Hamas or Fatah. If the Palestinians were nearly as worried about poverty (rather than cash flow) as the World Bank, their leadership would figure out how to produce something people in the real world value and for which they would pay.

Or at least stop destroying avenues of economic progress with Israel.

[1] Contrary to the media, the "intifada" did not being with PM Sharon's traditional visit to the Temple Mount. It began the day before that, with the killing of an Israeli policeman by his Palestinian "partner."

[2] Israel, it should be noted, absorbed the "intifada," the rocket attacks, and the 2006 rocket war from Hezb'allah in the north and spent increasingly large sums of public money on civil defense and missile defense. The Israeli economy bears a heavy burden in defense expenditures even with U.S. assistance (that is largely mandated to be spent in the U.S. and thus does not aid the Israeli economy).

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